Australian: Iron ore miners face $18bn hit

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#1
Open your eyes wide and big... believe in what you read not by merely looking at share prices that is engineered by controlling consters

Iron ore miners face $18bn hit
BY:BARRY FITZGERALD From: The Australian May 31, 2013 12:00AM
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Source: The Australian
FEARS that annual revenues of the Pilbara iron ore producers are in line for a combined hit of more than $18 billion have sent investors scurrying for the exits.

The revenue cut is a result of prices for the key steelmaking raw material slumping to a seven-and-half-month low of $US112.90 a tonne in response to a fresh bout of destocking by steel mills in China, amid slumping steel prices and over-capacity concerns.

Iron ore is now trading more than 22 per cent below its average for the March quarter of $US145 a tonne.

Based on expected production of 550 million tonnes this year, if the lower prices persist, annual industry revenues would be $18bn short of what the March quarter average indicated.

Weakness in iron stocks was a key factor in the broader sharemarket closing 0.88 per cent lower, its lowest level for six weeks.

The big three producers, Rio Tinto, BHP Billiton and Fortescue, were down by 1.35 per cent, 1.18 per cent and 3.35 per cent, respectively. Smaller producers were hit even harder, with Atlas Iron down 6.1 per cent and Mount Gibson down 4 per cent. Market sentiment is also lower after the Organisation for Economic Co-operation and Development lowered its forecast for Australia's economic growth for this year, and the International Monetary Fund downgraded growth forecasts for China, even as the price of construction steel fell sharply in that country.

Traders said smaller Chinese mills had been selling iron ore cargoes back to the market, and traders were unloading shipments at a loss amid expectations the price would fall further.

Commonwealth Bank's commodities analysts said that even with Chinese mills eventually replenishing stockpiles, a seasonal increase in China's own iron ore supply capability and an increase in global seaborne material "suggests that iron ore prices may be weaker in the second half of 2013".

The dramatic slide in iron ore prices from the mid-February peak of $US152 a tonne is expected to put new pressure on Rio chief executive Sam Walsh to consider deferring a decision on a planned $US5bn expansion of mine capacity at its Pilbara operations, scheduled for the fourth quarter of this year.

An increase in the mining rate to 360 million tonnes, up from the currently committed rate of 290 million tonnes, would match the locked-in capacity rate of Rio's port and rail infrastructure in the Pilbara.

But two weeks ago, Mr Walsh said that depending on the market, Rio could choose to either develop new mines to quickly deliver extra production, or conserve cash and fill some capacity with incremental output from existing mines. Since those comments, iron ore has fallen $US16 a tonne or 12 per cent.

Atlas head Ken Brinsden told The Australian yesterday that the volatility in the iron ore price -- it has traded as low as $US80 a tonne last September and as high as $US152 a tonne this February -- was due to the switch from annual benchmark contract pricing to index/spot pricing.

"It affords an opportunity for volatility to unfold in a way that it hasn't historically in iron ore markets, so we are getting used to that and positioning our business so we can deal with the volatility."

Mr Brinsden said that the price was unlikely to remain at lower levels for long because the fundamentals of the supply-demand equation pointed to strong demand.

"Our view is elevated pricing will prevail," he said.

Atlas for one is confident of pushing ahead with its growth projects.

The Perth-based miner updated the market on its operations yesterday, saying its board would decide next month whether to push the button on its Mt Webber operation, which has received the final state and federal government approvals.

"We take the view that our projects in general will be competitive in a global sense," Mr Brinsden said.

"We're not wildly optimistic about the price, but we think these projects will be competitive."

Pilbara neighbour Brockman Mining also sent a signal to the market yesterday that China was still keen on Australian iron ore.

It signed a non-binding agreement with Tianjin Port Group to allow the Chinese state-owned giant to explore the potential to invest in Pilbara infrastructure.
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#2
Steel and iron ore demand to slow
Angus Grigg AFR correspondent
544 words
5 Jun 2013
The Australian Financial Review
AFNR
English
Copyright 2013. Fairfax Media Management Pty Limited.
Shanghai China's new leaders will not embark on a fresh round of fiscal stimulus, leading to an oversupply of iron ore and only moderate growth in steel production this year, the head of China's largest-listed steel producer says.
In a downbeat assessment of the industry's prospects, the chairman of Baosteel, Xu Lejiang, said a painful period of adjustment lay ahead.
"Steel production is much higher than demand in China," Mr Xu said in a rare press conference in Shanghai on Tuesday.
"Iron ore production will also be way higher than demand shortly."
Mr Xu expects steel production to grow at between 1 per cent and 2 per cent this year, well down on the double- digit rates over the past decade.
China produced 716.5 million tonnes of crude steel in 2012, up 3.1 per cent from the previous year.
Mining giant Rio Tinto is expecting Chinese steel production to grow at a compound annual rate of 3 per cent over the next decade and steel production to peak at around 1 billion tonnes after 2020.
But many analysts doubt such a level will ever be met and believe steel production may peak in the next few years.
Chinese steel mills ramped up production at the end of last year in expectation that the incoming leadership would roll out new projects to boost the economy. But these projects have failed to materalise, pushing the iron ore price down 30 per cent over recent months to $US111 a tonne on Tuesday.
Steel prices in China have slumped to their lowest level since April 2009.
"The central government is focusing on economic transformation," Mr Xu said. "People are starting to realise there won't be another 4 trillion yuan [$645 billion] stimulus package."
In response to the global financial crisis, the Chinese government kept the economy growing strongly by financing a string of infrastructure and property projects.
The stimulus spending helped push iron ore prices to a record high of $US190 a tonne in February 2011, but also led to a spike in public debt and further distorted the economy. Premier Li Keqiang has said reform of the economy, rather than elevated growth rates, is his priority. China's economy is forecast to grow around 7.5 per cent this year.
Macquarie Group's Shanghai based commodities analyst, Graeme Train, expects the iron ore price to fall below $US100 a tonne as steel mills and traders continue to run down inventory.
"The price has been weak because of supply, not demand," he said. "We are going through another round of iron ore de-stocking."
He expects that process to run for another two months, despite steel demand growing by about 10 per cent in the second quarter.
"That's off a low base from last year, but demand looks OK," he said.
"The issue is that mills and traders are sitting on a great deal of expensive inventory which they are now putting into the market."
The profitability of China's steel sector has slumped in recent years as mills expanded production despite sluggish growth. The sector is now struggling with high levels of excess production capacity.

Fairfax Media Management Pty Limited

Document AFNR000020130604e9650002b
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